Abercrombie & Fitch (ANF) is perhaps best known for its controversial print advertisements in which young folk canoodle while being (scantily) clad in said retailer's clothing. The company has made neither bones nor apologies about making sex appeal a cornerstone of its sales pitches. Abercrombie & Fitch made a choice some time ago to target that section of the population.
Most other retailers are about functionality. Abercrombie is about looking good and looking hip. If you've ever been to one of their stores, it's almost like entering a club. A big placard with scantily clad young folk blocks your view into the store, which is counter to every rule of retailing -- let the customers see your wares from the entrance. Nope, not here. The idea is akin to the old peep shows at dust bowl carnivals. See the pictures of the pretty people? You can have that if you just... step ...inside.
Once inside, you see the clothes and the beautiful salespeople, all eager to help. That is, they're eager to help if you actually fit into their clothes. Abercrombie caters to the hip crowd and doesn't really offer much in the way of -- shall we say -- clothes of the extra-large variety.
Clearly, the concept works. Abercrombie now has 1,100 stores worldwide, and generated almost $3 billion of revenue in 2009. Regrettably, this was the second consecutive year that sales fell -10%, wiping out any profit the company had last year. Nevertheless, the company had $225 million in free cash flow, and more than $550 million in net cash, so it remains on solid footing.
Analysts see Abercrombie roaring back this year with earnings of $1.81. Analysts also expect earnings of $2.64 next year, and a 5-year average growth rate of +19.5%. And while 1,100 stores aren't that much when it comes to covering a planet, Abercrombie may be well on its way to becoming as ubiquitous as Nike (NKE).
There are risks, however. No matter how pretty the retailer in question is, it's still retail. If the economy sours further, or if the fashion trends of the notoriously fickle youth market swerve too hard and too quickly, Abercrombie could face lagging sales. That's not to say it won't survive -- half a billion dollars in cash on hand should prevent that from happening. The concern, though, is that the growth story will dry up and vanish very quickly.
That's the other big problem with retail. Things can turn on a dime. But I don't think this will be the case for Abercrombie. The company has consistently shown its ability to come back from hard times and adapt to a changing market.
Action to Take --> With a 5-year growth rate of +19.5%, a multiple of 19.5 is also reasonable for the Abercrombie. That's below the current multiple, but earnings should catch up to lower it. Thus, one might consider fair value for this year to be right where the stock trades now, but I think it could hit perhaps $50 next year, for a +35% return, with +20% annual returns thereafter. I see this as a good growth story with reasonable risk and consider it a buy.
-- Frederick M. Steier
About the author:
Amit Chokshi is the founder and owner of Kinnaras and affiliated companies and is responsible for security analysis, selection, portfolio management, and Firm operations. Prior to founding Kinnaras, he worked as an associate at the Royal Bank of Scotland ("RBS") in the firm's Corporate Advisory Services group, which provided corporate finance and mergers and acquisition ("M&A") services to the firm's clients with a particular emphasis on private equity firms. Amit also worked at Morgan Stanley and received a B.S. in Finance from Bryant University and an MBA from Emory University. In addition to passing the NASD Series 7, 63, and 65 exams, Amit is also a CFA Charterholder and on the Board of the Stamford CFA Society. Amit has appeared on Bloomberg Radio and has also been quoted in various publications regarding Firm-specific holdings.